TRIS Rating has affirmed the company and senior unsecured debenture ratings of The Union Mosaic Industry PLC (UMI) at “BBB-” with “stable” outlook. The ratings reflect UMI’s moderate market position as the third-largest producer of ceramic tile, its well-accepted brand name of products, experienced management, and the increased market share after acquiring T.T. Ceramic PLC (TTC) and The Royal Ceramic Industry PLC (RCI). However, these strengths are partially offset by higher leverage from a debt-funded acquisition, a deteriorating profit margin after the post-acquisition of TTC, cyclical nature of the industry, and the company’s exposure to volatile energy prices.
The “stable” outlook reflects the expectation that UMI’s financial profile will improve over the next two to three years, as TTC’s operation improves. UMI’s rating or outlook could be revised upward if UMI’s operating margin significantly improves as a result of a successful turnaround of TTC’s performance on a sustainable basis. In contrast, the rating or outlook could be revised downward if TTC’s operating performance is lower than expected, dragging UMI’s performance below the current level.
UMI is the third largest manufacturer and distributor of ceramic tiles in Thailand, holding 15% market share. UMI’s total capacity in Thailand is about 34 million square meters (sq.m.) per year. Its products include ceramic tiles, decorative tiles, clay tiles, as well as porcelain tiles. UMI’s tiles are sold under two well-known brands, Duragres and Duragres-Lila. RCI focuses on high quality wall tiles under the RCI brand name. TTC produces large porcelain tiles under the Cergres brand name, which are positioned in the high-end market segment. UMI and RCI products have been distributed in Thailand for over 30 years. Its products target middle- to high-end customers. About 95% of UMI’s sales are derived from the local market. The UMI’s growth tracks the growth of the modern trade distribution channel business, as about 50% of its products are sold through leading home improvement retailers.
UMI’s rating is constrained by TTC’s operating losses and rising debt burdens from its acquisitions. TTC’s ongoing losses pulled down the overall performance of UMI. However, TTC’s operation has been improving over time and is demonstrating a potential of turning to a profit-making company in the future.
Due to sluggish demand, UMI’s revenue in 2014 fell by 11.3% to Bt3,314 million after a peak of Bt3,736 million in 2013. UMI’s revenue fell more than the industry average due in part to UMI’s decision to cease production of mosaic tiles. The operating margin (operating profit before depreciation and amortization, as a percentage of sales) dropped to 4.6% in 2014, from 5.6% in 2013. The deteriorating margin reflects increasingly intense price competition in the market as well as TTC’s ongoing losses.
Since January 2015, UMI has recognized RCI’s performance through the consolidation method instead of the equity method as a result of a revision of Thai Financial Reporting Standards. UMI’s consolidated sales revenue in the first three months of 2015 slightly declined by 2.6% year-on-year (y-o-y) to Bt1,044 million as Thai economy recovered more slowly than expected. However, the operating margin increased to 10.2% in March 2015, from 5.7% in the same period of 2014. Profitability improved mainly because of the recovery of TTC’s operation. TTC’s revenue increased to Bt164 million in the first three months of 2015, a 10.8% y-o-y increase. TTC reported the operating margin of 1.7% in the first three months of 2015, rising from -15.3% in the previous year. TTC’s performance is expected to keep improving as it strives to increase its utilization rate as well as launch new high-margin products.
After recognizing RCI’s performance through consolidation method, UMI’s debt to capitalization ratio decreased to 47.8% as of March 2015 from 49.8% in December 2014. Total outstanding debt was Bt2,219 million, mainly comprising UMI’s bonds of Bt798 million, TTC’s restructured debt of Bt858 million, and RCI’s long-term loans of Bt284 million. UMI’s financial policy calls for each subsidiary to be responsible for its own debt repayment. Overall debt is expected to continue to decrease as UMI has no large investments planned in the foreseeable future. The maintenance expenditures are Bt100-Bt200 million per annum.
In terms of liquidity, UMI issued Bt1,000 million in a bond in July 2014 primarily to refinance its syndicated loans. After UMI repurchased its bond twice, the amount of bond outstanding was reduced to Bt798 million as of March 2015. There is a liquidity risk from the bullet payment when the bond comes due in July 2017. However, the risk could be partially mitigated because UMI is expected to repurchase more of its bond in the future. TTC’s restructured debt carries a very low interest rate and a long repayment schedule. TTC’s scheduled debt repayments were Bt26 million in 2015 and Bt53 million in 2016. TRIS Rating expects TTC to generate adequate cash flow to pay debts as its operation started recovering. RCI must pay Bt42 million annually to repay its long-term loans of Bt284 million. Its liquidity risk is acceptable, judging from its annual earnings before interest, tax, depreciation and amortization (EBITDA) of Bt80 million in 2014.
Going forward, TRIS Rating views that the operating performance of UMI is likely to pick up in the second half of 2015, driven by government’s budget disbursements and lower cost of natural gas. A potential of TTC’s turn around will be a main factor to bolster overall performance and provide upside potential of rating. The downside risk would come from the possibility of further delays in the government’s investment plans. Delays would cut demand in the building material sector and trigger price competition among tile producers.
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